Motorola

Uh-oh, Moto

Carl Icahn takes an interest in struggling Motorola

IT MAY come to be seen as the Motorola shock. The world's second-largest maker of mobile phones seemed to have been restored to health last year, thanks to its RAZR and other slimline handsets. But it stumbled badly in the last three months of 2006. In January it said its operating profits had fallen by 56% in the quarter compared with a year earlier, and operating margins had narrowed sharply. And this week the pressure intensified on Ed Zander, Motorola's boss. Carl Icahn, a renowned activist investor, said he had taken a 1.4% stake in the company, and demanded that Motorola start disgorging cash to shareholders.

Although Mr Icahn is an unsolicited caller, Mr Zander should listen carefully to his message. He should also consider what happened to Sony, Japan's electronics-and-media giant, after its earnings and shares suffered a similar collapse in 2003. As with Motorola, falling margins for core products were the proximate cause of the “Sony shock”. What really hurt Sony, however, was the unimpressive way in which it responded. Sony had long espoused vague ideas about exploiting the convergence between previously separate digital devices and forms of media. After the shock, investors asked tougher questions about how this would work. The more they asked, the clearer it became that Sony's boss at the time, Nobuyuki Idei, did not have an answer.

Motorola is in a similar pickle. Its sliding performance stems mainly from falling margins for mobile handsets, its core products. The iconic RAZR, launched in late 2004, enabled the company to increase its margins and gain market share. When Motorola followed up last year with the KRZR (a narrower version of the RAZR) and the Q (a slim phone with a keyboard for e-mail), it reassured sceptics who worried that the RAZR's success had been a lucky one-off. But the industry moves fast, and rivals have responded with their own slim models. Worse, Apple is entering the market with its first handset, the iPhone. Brian Modoff, an analyst at Deutsche Bank Securities, says Apple has produced something truly new, whereas Motorola is merely making incremental improvements.

As Motorola's handset business adjusts to these threats, however, an even bigger difficulty facing Mr Zander is how to handle questions about Motorola's other businesses. Like Sony's Mr Idei, Mr Zander likes to talk about convergence, and how his company will benefit from it by investing in whizzy new technologies such as internet-protocol TV and WiMax. Although he has made a few acquisitions to bolster this strategy, it is still rather vague. Mr Icahn wants him to return much more of Motorola's $11.2 billion cash pile to shareholders. To reject this suggestion convincingly, Mr Zander will have to start articulating his strategy with much greater clarity.